There is really no situation where a payday loan is the best possible option. People instead take these loans because there are no other options, or because they are uninformed or unrealistic about how much interest they are going to end up paying.

If all goes well with a payday loan, you’ll be paying it off prior to the due date so that you pay nothing but the standard fee. Even if you manage to do this, however, the amount you’re paying stacks up very unfavorably to even one of the higher-interest credit cards.

The standard range of payday loans is $10 to $30 during the lending period for each $100 borrowed. By comparison, you could carry about $1500 on a credit card with a less-than-favorable rate and still only pay in the area of $20 in interest per month.

That’s already an usurious level of fees, but things can still get much worse than that if you miss a payment. Fail to pay on time and you’re looking at a higher fee for the next period, plus the potential addition of late fees. All told, it’s not uncommon for those who carry a payday loan for a period of months to end up paying out two or three times what they originally borrowed in interest.

If They’re So Bad, Why Are They So Popular?

So why does the payday loan thrive? It’s mostly because there are still large swaths of the population that are not served by standard lenders. If you need emergency funds but can’t obtain a personal loan or a credit card, the payday loan often appears to be the only available alternative since these companies generally do not perform rigorous income or credit checks.

Payday loan services carefully choose locations to set up shop, as well. The majority of their borrowers are taking out these loans simply to cover a shortfall in their monthly expenses. That is why the brick-and-mortar locations of these businesses are disproportionately found in economically depressed areas, where there is a ready pool of low-income clients who are statistically more likely to hit a point at which they can’t make their basic ends meet.

In response to this, the vendors of payday loans will argue that these extremely high fees are necessary, as they are lending to a population that runs a much greater risk of defaulting on their loan.

Studies conducted by the Securities Exchange Commission tell a different story, however. They’ve compared the default rates of payday loans and standard personal loans issued by a bank, and have found there isn’t really a significant difference in the level of risk for the lender. People who take out payday loans are just as proportionally honest and responsible as those who have access to better banking services, but they labor under vastly more unfair terms to uphold their obligations.

What To Do Instead Of Taking Out A Payday Loan

A simple lack of financial literacy and awareness of viable alternatives is what fuels much of the payday loan industry. That, and their ability to advertise thanks to their colossal profit margins!If bank loans or a credit card aren’t available, a payday loan isn’t the only option for emergency funds, however. Other viable options include:

One option that is available but often never even considered is asking an employer for an advance. Some of the larger companies will even have posted policies outlining how they do this. Another avenue is a third-party startup that specifically facilitates pay advances as an alternative to payday loans — one of the bigger emerging names in this field is Elastic. This option offers an interest rate that is closer to that of a credit card , with fees as low as 5% for each $1,000 borrowed.

If you have a valuable item to put up as collateral, a loan from a pawn shop is also almost always going to offer much better terms than a payday loan will. Regulations vary by state, but pawn shops are generally limited to charging only 5% to 25% in finance charges per month by local laws.

Peer-to-peer (P2P) lending services like Lending Club and Prosper allow individuals to make small loans to each other at their own terms, which are generally far more favorable than a payday loan.

At an average cost of about 5% to take out $300, even a credit card cash advance is far more affordable than a payday loan. Even the fairly standard $30 flat fee for a checking overdraw of up to $300 technically beats a payday loan in cost (10% for the overdraft versus 15-30% minimum.

Conclusion

No matter how you look at it, a payday loan is a terrible deal. With all of the other options on the table, however, it’s not one you’re forced to take.